Friday, April 21, 2006

Market Power

Economists used to talk about “market power” in terms of the ability of a dominant supplier to set prices. The EU is beginning to get a taste of a different kind of market power, as Russia’s monopoly natural gas company, Gazprom, issues thinly-veiled threats about Europe’s future access to Russian gas. The context is Gazprom’s mooted acquisition of Centrica, a UK utility. A response along the lines of the US reaction of the CNOOC bid for Unocal, or even some of the recent cross-border energy transactions within the EU, could jeopardize long-term supplies of natural gas for the Continent.

How realistic is this threat? Well, from the European side, it has to be worrying. Local supplies of gas are mature and either in decline or poised to fall off in the next decade. Europe’s commitment to meeting its greenhouse gas emissions targets under the Kyoto Agreement, combined with the aversion outside of France and Scandinavia to more nuclear power, makes gas and wind the only viable alternatives to coal in the power sector. And the EU is already building about as much wind power as they can handle. Russia is both Europe's largest gas supplier today and its logical incremental supplier, as well.

But could Russia make good on a threat to divert future, incremental supplies to other markets? Having the world’s largest natural gas reserves, by far, does you little good if they aren’t connected by dedicated infrastructure to a market that can pay. What should give the EU pause here is that Russian gas, much of which will be coming from the East, is a natural fit for fueling the expansion of China. Some of it is also well-situated to supply the West Coast of the US via LNG. All of this takes capital in large doses, but Gazprom is flush with cash, and you can’t tell me that European banks wouldn’t line up to help finance Russian pipelines and LNG facilities, even if they weren’t intended to supply the EU.

Russia is still learning this game, and its moves so far seem a bit ham-handed. Playing hardball with your biggest, richest current customers isn’t very good business, as I’ve suggested before. But however undiplomatically Gazprom has been conveying its message, European business and policy leaders need to pay attention and give serious thought to the kind of relationship they want to have with Russia, as the latter emerges from its temporary basket-case status of the 1990s.

No comments: